National income

• The 2 types of of flows in ‘the circular flow of income’


  are physical and monetary flows
• National income measured the monetary value of the flow of output of G+S produced in an economy over a period of time
• Formula to calculate Real GDP is NominalGDP x100 /Price index
• The key uses of national income data is help identify: the rate of economic growth, changes to living standard, changes to the distribution of income between groups within the population.
• In the circular flow of income, households provide the factors of production to firms in exchange for income
• In the circular flow of income, Firms produce the goods + services and they make up the national output.
• The monetary flow (curved lines) curve in the circular flow shows the money that pays for the “physical things” such as consumer expenditure and factor income
• The physical lines (straight lines) show the direction of ”real things” such as the goods, services, labour, land
• The cir flow of income is between firms and households
• In the circular flow of income, National income is money that is paid to households by firms for the factors of production
• Nominal GDP is not adjusted for inflation
• Income is a flow of money
• Wealth is the total value of all the assets ownership by individuals or firms in an economy, stock concept
• The GDP methods used in the circular flow of income are output method(G+S), Income method (leakages), Expenditure method (injections)
• In the circular flow of income, national out comes first, then it’s national income, then it’s national expenditure
• In the circular flow of income, When households receive national income they spend it on goods and services and this value of spending is called national income.
• In the circular flow of income, households benefit from giving firms the factors of production because they receive national income. As firms sell their G+S, they generate revenue. This revenue becomes the income for the factors of production by households (wages for labour, rent for land etc)
• Firms provide national output by creating goods and services
• Firms create national output through the households that provide the factors of production that firms will use to produce goods and services
• The formula for the circular flow of income is national output = national income = National expenditure
• Real GDP is adjusted for inflation
• Households provide firms with the factors of production because households receive money paid to them by firms (national income)
• Households provide firms with the factors of production
• If withdrawals are greater than injections it means that output is greater than expenditure
• If injections are greater than withdrawals, it means that expenditure is greater than output
• If injections and withdrawals are equal then the economy is in equilibrium
• Injections are taken IN from the expenditure in the circular flow diagram
• Withdrawals are taken OUT from income in the circular flow diagram
• The injections are exports, government spending and investment
• The withdrawals are taxation, imports and savings
• A withdrawal is when money is taken out of the economic system
• An injection adds money to the circular flow, stimulating economic activity and influencing overall income levels
• The factors that cause a low multiplier value is when the economy is close to capacity limits (eg during a boom), Propensity to import G+S is high as it means extra demand leaks from the circular flow, Higher inflation causes rising interest rates which then Damian’s the other components of AD
• The factors that affect/cause a high multiplier value is when an economy has high capacity to meet AD (more unused capacity = plenty of resources available to respond to increase demand), Marginal propensity to tax and import is low, High propensity to consumer any extra income (use more money), Economic conditions (levels of unemployment, interest rates), Government policy (Fiscal policy, govt spending more money)
• The effects of the multiplier on the economy is extra demand, Factor incomes created (more money for people), more job opportunitie, economic output (GDP increasing, stimulates production and more spending)
• A negative multiplier effect is when an initial decrease in an injection leads to a greater final decrease in real GDP
• A positive multiplier effect is when an initial increase in an injection leads to a greater final increase in real GDP
• Formula for the multiplier is 1/1-MPC or 1/MPW
• injections cause the multiplier effect because injections of new demand for goods and services into the circular flow of income stimulates further rounds of spending because “one persons spending is another’s income”
• The definition of the multiplier is a process in which any changes in the components of AD will lead to an even greater change in national output